Boston University
595 Commonwealth Avenue, Boston, MA 02215
Email: haoxing@bu.edu
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Research
Research
Stochastic Control and its applications in Mathematical Finance and Financial Economics
Working paper
Working paper
Optimal contract, delegated investment, and information acquisition, with Yuyang Zhang, [SSRN]
This paper examines a model of delegated investment within the framework of a noisy rational expectations equilibrium. The optimal contract for portfolio managers includes a benchmark component that mitigates agency frictions arising from portfolio management costs. Private and public signals substitute. When portfolio management costs increase, both the performance and benchmark components of the optimal contract increase, less private signals are aggregated into the public signal, leading to a worse public price informational efficiency.
Executive compensation and pollution: theory and evidence, with Jérôme Detemple, [SSRN, New Version]
Best paper award in sustainable finance and ESG, World Finance Conference 2024
We show that the pay-for-performance sensitivity on cash flow is reduced in the optimal contract to incentivize pollution abating investment. Using a large language model based information extraction technique, we find empirical evidence supporting our model implication. Compared to the socially optimal contract, we show the private optimal contract over-incentivizes production and under-incentivizes pollution abating investment. A dynamic extension of the model further reveals that firms may terminate environment-linked pay and increase emissions before imminent default.
Process intangibles and agency conflicts, with Hui Chen, Ali Kakhbod, and Maziar Kazemi, [SSRN]
We reveal and study a new empirical fact: Executive and skilled labor pay is increasing in firm process intensity (the fraction of intangibles used to improve the efficiency of the firm). We rationalize this fact in a dynamic principal-agent model. The optimal contract reveals a direct and indirect effect of process intensity on compensation. We verify these effects in the data. In our baseline specification, a one standard deviation increase in process intensity is associated with an 8% increase in executive pay and a 3% increase in skilled labor wages relative to industry peers.
Heterogeneous learning in product markets, with Ali Kakhbod and Giacomo Lanzani, [SSRN]
Heterogeneous learning abilities among consumers introduce inefficiency to competitive online product markets. Inefficiency emerges due to a learning externality generated by consumers with inferior learning ability.
Forthcoming
Forthcoming
Model ambiguity vs. model misspecification in dynamic portfolio choice, with Pascal Maenhout and Anne Balter, [SSRN]
Forthcoming in Journal of Finance
We study aversion to model ambiguity and misspecification in dynamic portfolio choice. Risk-averse investors (relative risk aversion \gamma > 1) fear return persistence, while risk-tolerant investors (0<\gamma<1) fear mean reversion, when confronting model misspecification concerns of IID returns. The intuition is that risk-averse investors, who want to hedge intertemporally, endogenously fear return persistence, which precludes hedging. A log investor is myopic and unaffected by model misspecification, therefore only worrying about model ambiguity. Our model can generate belief scarring, nonparticipation in equity markets, and extrapolative return expectations. Extending beyond IID returns, we study model misspecification for a mean-reverting Sharpe ratio.
Robust inattentive discrete choice, with Lars Hansen and Jianjun Miao, [SSRN] [Chicago Booth Review]
Forthcoming in Proceedings of the National Academy of Sciences
We consider a rationally inattentive decision-maker who is ambiguity averse with respect to his prior belief over the possible states of the world. We provide necessary and sufficient conditions for the robust solution and develop numerical methods to solve it. In comparison to the rational solution with no prior uncertainty, our decision-maker slants priors in more cautious or pessimistic directions when deducing how to allocate attention over the range of available information. We explore some examples that show how the robust solution differs from the rational solution with a commitment to a subjective prior distribution and how it differs from imposing risk aversion.
Publications
Publications
Does the level of cash always increase with firm size? Theory and evidence from small firms, with Ali Kakhbod, Max Reppen, and Tarik Umar, [SSRN]
Review of Finance, 29: 661-683, 2025
Best paper in Corporate Finance, Southwestern Finance Association Annual Meeting 2023
Robustness and Dynamic Sentiment, with Pascal J. Maenhout and Andrea Vedolin, [SSRN]
Journal of Financial Economics, 163: 103953, 2025
Dynamic discrete choice under rational inattention, with Jianjun Miao [PDF]
Economic Theory, 77: 597-652, 2024
The following package provides an efficient algorithm to solve multiple states and long horizon dynamic discrete choice problem [Package]
The dark side of circuit breakers, with Hui Chen, Anton Petukhov, and Jiang Wang [SSRN]
Journal of Finance, 79(2): 1405-1455, 2024
Performance evaluation, managerial hedging, and contract termination, with Yu Huang and Nengjiu Ju, [SSRN]
Management Science, 69(8): 4953-4971, 2023
Radner equilibrium and systems of quadratic BSDEs with discontinuous generators, with Luis Escauriaza and Daniel C. Schwarz, [Arxiv]
Annals of Applied Probability, 32(5): 3492-3536, 2022
Incomplete stochastic equilibria with exponential utilities: close to Pareto optimality, with Constantinos Kardaras, and Gordan Žitković,
Stochastic Analysis, Filtering, and Stochastic Optimization: A Commemorative Volume to Honor Mark H. A. Davis's Contributions, 267-292, 2022, [Publisher version]
Capital allocation under Fundamental Review of Trading Book, with Luting Li,
Risk Magazine, cutting edge session, 2019, [Journal] [Extended version] [Presentation]
Equilibrium asset pricing under optimal contracts, with Jakša Cvitanić,
Journal of Economic Theory, 173:142-180, 2018. [SSRN]
A class of globally solvable Markovian quadratic BSDE systems and applications, with Gordan Žitković,
Annals of Probability, 46(1):491-550, 2018. [Arxiv] [Presentation]
Convex duality for Epstein-Zin stochastic differential utility, with Anis Matoussi,
Mathematical Finance, 28: 991-1019, 2018. [SSRN]
BSDEs with diffusion constraint and viscous Hamilton-Jacobi equations with unbounded data, with Andrea Cosso and Huyên Pham,
Annales de l'Institut Henri Poincaré (B), 53(4):1528-1547, 2017. [Arxiv]
Consumption investment optimization with Epstein-Zin Utility in incomplete markets,
Finance and Stochastics, 21(1):227-262, 2017. [SSRN]
Long term optimal investment in matrix valued factor models, with Scott Robertson,
SIAM Journal on Financial Mathematics, 8:400-434, 2017. [Arxiv]
Stability of the exponential utility maximization problem with respect to preferences,
Mathematical Finance, 27:38-67,2017. [Arxiv]
Robust portfolios and weak incentives in long-run investments, with Paolo Guasoni and Johannes Muhle-Karbe,
Mathematical Finance, 27:3-37, 2017. [SSRN]
Asymptotic Glosten Milgrom equilibrium, with Cheng Li,
SIAM Journal on Financial Mathematics, 6(1):242-280, 2015. [Arxiv]
Large time behavior of solutions to semi-linear equations with quadratic growth in the gradient, with Scott Robertson,
SIAM Journal on Control and Optimization, 53(1):185-212, 2015. [Arxiv]
Abstract, classic, and explicit turnpikes, with Paolo Guasoni, Constantinos Kardaras, and Scott Robertson,
Finance and Stochastics, 18(1):75-114, 2014. [Arxiv]
Point process bridges and weak convergence of insider trading models, with Umut Çetin,
Electronic Journal of Probability, 18:26, 2013. [Arxiv]
Long-term and blow-up behaviors of exponential moments in multi-dimensional affine diffusions, with Rudra Jena and Kyoung-Kuk Kim,
Stochastic Processes and their Applications, 122(8):2961-2993, 2012. [Arxiv]
Regularity of the optimal stopping problem for jump diffusions, with Erhan Bayraktar,
SIAM Journal on Control and Optimization, 50(3):1337-1357, 2012. [Arxiv]
On backward stochastic differential equations and strict local martingales,
Stochastic Processes and their Applications, 122:2265-2291, 2012. [Arxiv]
Valuation equations for stochastic volatility models, with Erhan Bayraktar and Constantinos Kardaras,
SIAM Journal on Financial Mathematics, 3:351-373, 2012. [Arxiv]
Strict local martingale deflators and pricing American Call-type options, with Erhan Bayraktar and Constantinos Kardaras,
Finance and Stochastics, 16:275-291, 2012. [Arxiv]
Pricing Asian options for jump diffusions, with Erhan Bayraktar,
Mathematical Finance, 21(1):117-143, 2011. [Arxiv]
On the uniqueness of classical solutions of Cauchy problems, with Erhan Bayraktar,
Proceedings of the American Mathematical Society, 138(6): 2061-2064, 2010. [Arxiv]
Analysis of the optimal exercise boundary of American options for jump diffusions, with Erhan Bayraktar,
SIAM Journal on Mathematical Analysis, 41(2): 825-860, 2009. [Arxiv]
Pricing American options for jump diffusions by iterating optimal stopping problems for diffusions, with Erhan Bayraktar,
Mathematical Methods of Operations Research, 70(3): 505-525, 2009. [Arxiv]
Pricing American options for jump diffusions with iterated SOR, with Erhan Bayraktar,
Proceeding of the Fourth IASTED International Conference on Financial Engineering and Applications, 2007.
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